outsourcing option models

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Pricing Models : Linear to Non-Linear

25th November ‘08

Company Confidential 1

Outsourcing Pricing Framework

Outsourcing

Traditional

T&M

FP/SLA

Managed Services

BOT

Reverse

Traditional

JV

Profit & Risk Sharing

Innovative Pricing

Transaction base

Subscription base

Ticket base

Revenue sharing

R&D offshorizing

• Standardize RFP process management for all kinds of deal depending on deal size

• Authority Metrics and sign-off authority by Delivery, Sales and Finance as per deal size

• Published Pricing manual


Traditional Vendor Model

• Offshorization of IT services, Infrastructure management services, CIS & BPO and Product

Engineering Services – spanning Staff Augmentation to Managed Services modelKey

Rationale

Key Benefits

● Cost advantage on Talent / Infrastructure, Productivity Improvements

● Capabilities, Operational Integration

Pricing Structure

• Time & material ( Time & Expenses)

• Fixed Price project

• Patni can consider offering volume based discounts, deferral/waive off of transition

cost based on volume commitments

Points to Ponder

• Ability to consistently offer Productivity savings

• Dilution of control

• YOY Price uplifts, Attrition

• Domain Capability, Scale & Delivery Excellence

• Global sourcing solutions from Patni have helped organizations worldwide to reduce

cost and scale up operations while focusing on their core competency

• Patni’s next generation Managed Services Model has an built-in ability to effectively

predict the impact on cost and also provide plug and play service levels to address

events, such as, acquisitions, divestitures, rollouts, and expansion into new geographies

Patni’s Expertise

Strategic Value due to

global consulting

experience


Traditional Vendor Model – TCO Savings

• Global outsourcing models have helped realized savings for strategic customers in terms of labor arbitrage, economies

of scale due to application consolidation, robust project management. A typical savings realized in TCO is demonstrated

as under :

TCO : As-Is TCO : To Be TCO : IT Transformation*

Realized 20%-25% savings in GDM model for strategic customers as continuous productivity improvements

Additional Investments required to drive platform rationalization and agility, Monetized upfront investments.


Build Operate & Transfer (BOT) Model• The Build-Operate-Transfer (BOT) model offers a middle path to help organizations enjoy the

benefit from offshore services while mitigating the risks involved, with the flexibility of going

captive at any time.

Key Rationale

Key Benefits

● End To End Process Control, Intellectual Property

● Access to global best practices in offshoring

Pricing Structure

• Set up of Captive Operations : Capital expenditure + Service fees for program management

• Ongoing recurring fees until transfer : Transition Fees + Fixed fees/FTE till transfer

• Transfer Fees : Fee associated with transfer of resources based on # of months revenues per

FTE transferred

• Patni can consider (a) sharing of Joining bonus for employees transferred (b) offering volume based

discounts (c ) waive off transfer fees post minimum number of years of operations say six to seven years

Points to Ponder

• Higher attrition by ~ 10%-15%, utilization lower by ~ 5%-10% due to skill Gaps and lack of

productivity tools, Ability to flatten pyramid, Lack of growth, underutilized facility

• Incremental Management Overheads

• Low visibility on career path for resources

• Patni has successfully executed BOT models in BPO and Product Engineering Services

segment. In collaboration with Patni, organizations have transformed its IT services

into a high-performance, cost-effective function and built sustainable captive units

Patni’s Expertise

Matured Model on

experience Curve

Client in BPO


Outsourcing

5

BOT commercial structure can be designed to follow client objectives

Year 1 Year 2 Year 3 Year 4 Year 5

Obj

ecti

ves

Time period & maturity of relationship and experience

Outsourcing

Year 1 -2 • “Best in class” Outsourcing Program• Global delivery leverage • Immediate cost reduction, • Robust Service Delivery Framework

• Customized Transition Methodology • Centralized delivery platform • High degree of Operations control• Robust delivery platform • Immediate process improvements / standardization

Year 2 – 3 • Sustained outsourced model• New geographies• New Service Offerings

• Continuous process improvement• Transformation and process re-engineering • Valuation best practices

• Mutually identify opportunities to expand the coverage in service outsourcing

• Innovation Center to support Client to identify-validate and incubate new services areas

• Explore markets for commercialization opportunities• Gain Sharing

• Explore alternate engagement models: 1. Transfer Model to create

captive

2. Create New Entity for joint-go-to market

• Continue in Outsourced Model

Year 3-5

2 Options


6

Outsourcing

BOT New entity creation (Capex monetization)


Obj

ecti

ves


Outsourcing



Exercise of Create option

CREATE New Entity • Develop and implement Business Plan

- Market Size- Competitive landscape- Customer Profiling- Go to market strategy- Commercial “Product” development- Financial Outlay / mutual investments- Executive structure - Contingency Planning, Risk Mitigation- Exit Plan

Flexibility for Capex monetizationSustained productivity and processesMetric Improvement


7

Outsourcing

Transfer Options


Obj

ecti

ves


Outsourcing



Trigger TRANSFER option: • Option to Transfer and create a 100

% owned Captive• Trigger Point of Transfer can be at at

the end of 2nd year, 3rd Year and can be exercisable till end of 5th year

• Sliding scale Transfer fee for termination during Years 3,4,5

Exercise of Transfer option

The transfer fees model can be structured as under:

— Transfer at the end of Year 2 – X months fees

— Transfer at the end of Year 3 – X-Y months fees

— Transfer at the end of Year 4 – X-Y-Z months fees


Inception Y 1 Y 2 Y 3 Y 4 Y 5

BOT : 2nd Year BOT : 3rd Year Captive Centre Managed Services - ODC

Transfer Fees Incremental Capex for new

Facility post transfer

BOT TCO Example : Comparison with Captive Set up

Upfront Capex for Customerfor setting up a CaptiveCentre

Typically Capex will be TIME NEUTRAL….under BOToperations

Typical savings in TCO would be ~ 15%-20% for 300 + HC ODCCapex Monetization can be considered while structuring the deal


Estimated additional Y%savings

BOT Program Benefits

Up to 25-30% Cost Savings due to

Offshoring

• USD YY 6Mn savings in year 1

• USD YYMn savings in year 2

Consolidation, Standardization & Functionalization

Global Delivery Model

• Consistent Execution

• Captive like Control

IT Transformation, best shoring location coupled with ongoing productivity improvements

PLUS

Optimized Cost Structures to the client

End to End Process Control Intellectual Property Delivery Excellence

Benefits

Key Value Adds

Patni is one of the few organizations to have executed a SUCCESSFUL large scale BOT


Joint Venture (JV) Model• In a JV model, client and offshore supplier may set up a joint venture vehicle, which will

predominantly service the client's business. The offshore supplier brings the local expertise

and service skills while the client brings its knowledge of its existing business function and

maintains greater management control.

Key Rationale

Key Benefits

● Joint Go-To- Market Plan, selling services in open market and high revenue creation

● Easy transition of assets/staff and high service continuity

ModelStructure

• Tie up with the vendor firm : Taking up equity stake in vendor firm OR Forming an independent entity

in which each party contributes

• Profit sharing hinges on various factors i.e.• Investment profile, risk sharing, Existing contracts/relationships

• Ability to influence incremental revenues into JV

• Pull through revenues from Go-To-Market plan and addition of new service lines

Points to Ponder

• Slower decision making, Cultural integration

• Consolidation and economies of scale may be sub optimal

• Patni has a scale and strategically poised to successfully execute JV models in IT

outsourcing domains.

• Patni has requisite expertise to operate JV models and thereby mitigate the risks of

internalization for client organizations

Patni’s Expertise

M & A Expertise

can be leveraged

Client in Japan


11

JV Transaction Rationale


Obj

ecti

ves

Year 1 • Creation of Entity• Margin accretive • Memorandum of understanding• Integration• Go-To-Market Plan• Global delivery & sales platform

Year 2-3• Steady State model • Revenue Growth• Additional Investments• New Service Offerings

Trigger Exit option: • Option to Exit on mutually agreeable

terms• Valuation of JV and transfer of

ownership Exit

option


• Partner transfers its’ existing in-house call centers/ Captive centre/Projects to a subsidiary

• Patni acquires 51% equity stake in the subsidiary forming a JV at a valuation of 0.5 x revenue

multiple

• Partner will transfer to the JV the requisite resources currently employed in the call centers

• Patni will at its’ cost set up a dedicated offshore call center to support the JV

• JV will provide services to the Partner at ~ 30% guaranteed savings to its’ current costs

• JV to be incorporated in a Tax efficient location

• Patni will buyout the balance 49% equity stake in equal tranches at the end of year 3, 4 and 5

• The buyout will be at pre-agreed valuation.

A Suggested JV Partnership Model

Key Hypothesis

• Assured savings of 30% from day 1, Competitive edge by lowering costs,

• Complete control on quality

• Assurance of Patni support and continuity of services post divestment

• Partner will be able to consolidate revenue and profits from JV into its own P&L

• Immediate increase in profits - positive impact on market cap

Advantage To Partner

• Equity ratio 51:49, Outsourced services (500 resources growing @ 10% for 5 years)

• Partner cost of own resources - US $ 40 per hour (fully loaded post utilization) at 75%

utilization factor

• Blended billing rate - US $ 28 per hour, blended cost of resources from Patni $ 15 per hour

• SG&A cost - 2% of sales

KeyAssumptions


JV Estimated Profit Outlook for Partner


Value Propositions

Estimated Savings For Partner

Value Creation


TCO Comparison : As-IS v/s Outsourcing v/s JV …1


TCO Comparison : As-IS v/s Outsourcing v/s JV …2

0.0

12.0

24.0

36.0

48.0

60.0

Y-1 Y-2 Y-3 Y-4 Y-5

AS-IS OutSourcing JV Proposal

Twin advantage through JV Model : Value Creation & Optimum TCO


Gain Sharing Model (GSM)

• In a GSM model, client and offshore supplier agree to share financial benefits of setting up /

rationalizing IT solutions. This will be more popular in scenarios wherein client wants to cut

the flab from its application portfolios (License, infrastructure and man power savings) and

align IT to business drivers without upfront investments.

Key Rational

Key Benefits

● Trim the entire application portfolio by retiring/ consolidating applications/functionalities.

Business-IT alignment of key business processes.

Model/ PricingStructure

• Gain Sharing based on agreed ratio between Client and Vendor

• Gain = (Financial benefits from IT rationalization/New solution set up – Client’s cost of

implementing the solution )

• Gain Sharing % hinges on various factors i.e.• Project complexity

• Amount of risks assumed in delivering the project

• Client and Vendor can equate the gain sharing % with Internal Rate of Return and arrive at the WIN-WIN

agreement

Points to Ponder

• Tangibility of financial benefits, need to have pre-determined metrics of measurements.

• The business case ratification depends heavily on ROI analysis, low ROI cases may not qualify

• Patni has effectively executed GSM models for its key strategic customers and has

requisite expertise to offer desired solutions to its clients which will share the risks of

solutions’ effectiveness as well reduction of operating IT expenditure.

Patni’s Expertise

Maturing on experience

Curve

No. of clients in BPO and financial services sector


A Suggested GSM Model …1

• A Joint PMO to be formed to execute projects based on GSM.

• Patni will do detailed assessment of a set of applications and present the opportunities to

execute projects under the above framework to the Joint PMO.

• The joint PMO would evaluate, prioritize and decide the projects for execution.

• The following criterion would be used to evaluate project from a commercial standpoint to be

executed under the gain sharing model

• Category A : Delivery Efforts ranging between 200 to 300 Person days with Minimum net

savings of $ 200,000

• Category B : Delivery Efforts ranging between 300 to 1000 Person days with Minimum

net savings of $ 300,000

• Based on individual project parameters such as savings schedule a 12 month or an 18 month

period can be used to arrive at the Net Savings.

• Any project which would do not satisfy the above criterion for effort and net savings would

have to be discussed and negotiated separately for eligibility for execution and payout.

• Net Savings: Potential Benefits (as agreed per standard tools and methodologies ) –

Customers Costs of implementation including any cost for third party services other than Patni

Gain-SharingFramework

• Customer partner wants to reduce total cost of ownership through Application Portfolio

Rationalization to be leveraged through license, infrastructure, man power optimization.

• The outsourced projects will result into measurable savings for the customer and these savings

will be share as per agreed ratio. GSM will act as “Mortgaging the future” for customers.

Key Hypothesis



Metric Category A Category B

Payout to Patni 50% 50%

Payout Schedule Paid over 4 qtrly installments 15% - First Milestone

35% - 4 qtrly Installments

Gain-SharingPayout

Indicative Only

As-IS Outsourced

Key Benefits to Customer

•Guaranteed minimum savings

From vendor

•TCO reduction compared to

traditional outsourcing

•Productivity improvement

•No upfront investment

0.5 m

As-IS Costs

TCO ExampleCategory A Projects

Vendor Fees0.2 m

Own Costs0.1 m

Vendor Gain Share

0.25 m

Gain Share

0.3 m 0.25 m


Revenue Sharing Model (RSM) through Product takeover• In an RSM model, offshore supplier agree take over one/selective product line segment

including responsibility of Product R&D management, upgrade, break-fix, warranty etc

• Product take over can be an asset take over AND/OR revenue sharing agreement

Key Rational

Key Benefits

• Improvement in IT product margin profile

• To de-risk initial investments and offering true partnership by sharing business risks

Model/ PricingStructure

• Depending on the Product lifecycle, revenue sharing can rest on various factors i.e.• Risk assumed by Vendor

• Investment needs and incremental costs of developing the new product

• Marketing efforts by client organization

• Revenue Sharing can be either of

• A blanket revenue sharing % between Client and Vendor

• A step up revenue sharing model based on # of units of product sale.• Client and Vendor can equate the gain sharing % with Internal Rate of Return and arrive at the WIN-WIN

agreement

Points to Ponder

• IP rights, marketing strategy, product maturity

• Sustainable market and ability to generate upgrades refresh

• Patni has embarked on RSM models for its key strategic customers and has been in

discussion to successfully execute this model by leveraging it’s global sourcing solution

expertise.

Patni’s Expertise

Gaining traction

Proposed to CA, another potential client in

Insurance sector


A suggested Revenue Share Model ..1

• To develop Customers IT product line, upgrade the existing product etc.

• To explore options to develop/takeover IT product line segments thereby improving :

• Customer’s IT products margin profile on accretive basis by minimizing the initial

investment needs for product development,

• Offering a revenue sharing pricing model.

Business Model / Hypothesis

Product Takeover Options /Rational

Scenarios

• To develop Product at offshore

• To re-badge product R&D employees

• To Take over entire product line segment including responsibility of Product R&D

management, upgrade, break-fix, warranty etc.

• Product take over can be an asset take over AND/OR revenue sharing agreement.

• To de-risk initial investments and become partner in true sense by sharing business risk.

• Two scenarios assumed :

• Scenario -1 : Develop new version of product and launch at < 15% compared

to current price of $ 800 per unit

• Scenario -2 : Develop new version of product and launch at > 15% price

compared to current price of $ 800 per unit


A suggested Revenue Share Model ..2

Product Development

• Patni will develop new version of product/ new product

• Product lifecycle assumed for three years. Development phase 3-6 months and sales cycle for

2.5 years

• Development and support team will operate from offshore

• No upgrades assumed during the lifecycle

Product Sales & Marketing

• Sale of 2800 Units of Parent product & 2500 Units of add-on products assumed

• Direct sale assumed at 75% while 25% sale through distributors. Sale through distributors

assumed to be at 30% discount.

• 30% sale in Yr-1, 45% in Yr-2 and 25% in Yr-3.

Revenue Sharing

• Patni Proposes Step up Revenue Sharing model to Customer on product sale.

• Revenues < $ 2 m : 33 % Revenue Share to Customer

• Revenues $ 2 m - $ 4 m : 50% Revenue Share to Customer

• Revenues > $ 4 m : 67% Revenue Share to Customer

• The rational for revenue sharing considers key attributes i.e. Risk assumed by Patni, Margin

Accretion for Customer, No upfront investments for Customer etc.

Summary Financials

• Revenues for scenario I works out to $ 3.3 m, while for Scenario II works out to $ 5 m,

Customer will earn ~ 29% net margins on product sale post 10% Sales & Marking costs.

• All revenues will be shown under Customer’s books as top line


Summary Financials : Customer’s P&L Account

Scenario I : Price @ $ 600

Scenario II :Price @ $ 900

Revenue Share to Customer~ 39% ($1.3m)

Marketing Costs ~ 10%

Revenue Share to Customer~ 47% ($2.3m)

Marketing Costs ~ 10%


SPV (real or virtual) Pricing Structure : Creation of IT platform on a joint venture basis, creation of IP, sharing of risk and reward, joint investment by partners, creation of enterprise value over a period of time, partners can exit the model by getting share in enterprise value.

Pricing Structure

First 9 months:

Re-badging

Ongoing Fees until

exit from SPV

Ongoing Fees post

exit from SPV

Enterprise ValueOn-going

Operations

On-going

OperationsEnterprise Value

On-going

Operations

• Upfront $YY mn

receipt of

Enterprise value

• Fees associated

with Rebadged

resources to be

billed at 5% mark

up to SPV

• Amortization of

5% mark up in

Year 2 and 3

• Fee associated

with FTEs

engaged in

Operations for

Onsite (20%) and

Offshore (80%)

• Balance share of

Enterprise Value

• Fee associated

with FTEs

engaged in

Operations for

Onsite (20%) and

Offshore (80%)

Receivable by customer Payable by customer

Couple of clients in Europe,

virtual SPV


Revenue from multiple elements; buy out asset, further development and maintenance of the asset and share upside.

• IP Purchase of “Platform A” - educational management information system for GBP ZZZM

• Development of enhanced technological version “IP B” and maintain both “A” and “B” IP.

• Committed Revenue Stream ~ GBP YYm for 7 years

• Incremental Revenues –linked to success of the new product . Huge Potential as current

market share of XXX is only 20%.

• XXX part of XXX group plc , a GBP 4 billion group. XXX group is a FTSE 100 international service

company which combines commercial know-how with a deep public service ethos.

• XXX Learning provides innovative, 21st century educational technology solutions to schools and

local authorities throughout the UK and abroad.

• Our relationship with XXX started in 2007.

• Currently we have revenues of $8mn annually primarily in enterprise software.

Company Profile

Patni – XXX

Association

Transaction

Scope

Upfront payment (Capital Payout) of GBP ZZZ mn to purchase the IP.

• Two Contracts to be created.

•Contracting Entity from Patni : Patni UK

•1st Contract: Patni UK to purchase IP from XXX Ireland; 2nd Contract: Services contract between

Patni UK & XXX UK .

•Revenues to be as “Service Income” for the minimal guaranteed amount. For Additional/Incremental

Revenues; terminology to be decided. Can be called as “Royalty / Bonus revenues”.

Deal Construct


Strategic Considerations in Outsourcing

Metric Point of View

Upfront Cash Infusion One time Cash infusion of $ Y mn or monetization of IT transformation Costs

Leverage Based Incentives Gain Sharing with customer for incremental offshore leverage

Price Uplift Cooling Period To be decided mutually for large to very large deals

KT/RT Deferment The cost of Transition, both Knowledge Transition and Responsibility Transition, may not be invoiced as incurred, but charged to customer on a over the 36 month engagement period.

Innovation Funding Establishment of an Innovation Fund to be used for R&D. innovations and productivity improvement. The magnitude of this will be decided mutually.

Upfront Discount Upfront payment of discount for the entire contract period can be considered

Forex Coverage Upto 5%+/- absorption of forex movement

Retention Bonus Specifically applicable in BOT/JV agreements, sharing of retention bonus for employees getting transferred to Customer under transfer option in BOT

Re-Badging Rebadging of Customer’s existing IT resources

Asset Take Over Cash infusion by engaging a third party lease back of customer’s assets

Productivity Based Incentives Productivity linked incentive bonus maximum of 2% yearly invoiced amount

IP Acquisition Acquiring the IP and monetization

Virtual Special Purpose vehicle

Creation of IT platform on a joint venture basis, creation of IP, sharing of risk and reward, joint investment by partners, creation of enterprise value over a period of time, partners can exit the model by getting share in enterprise value.


Outsourcing Model Comparison – Summary viewMetric Traditional

VendorBOT JV Gain Sharing Revenue

Sharing

Service Portfolio IT Services, Product Eng,BPO, CIS, IMS

IT Services, Product Eng,

BPO, CIS, IMS

Traditional IT services, New

Geography expansion

IT Portfolio rationalization

Business-IT alignment

Existing Product Take over / New

Product development

Vendor Involvement High High Till Transfer Phase

Shared High High

Cost Reduction/ Financial benefits

Substantial Substantial Substantial Substantial Substantial

Enhance Quality Maximum Maximum Maximum Maximum Maximum

Flexibility High High Medium Medium Medium

Degree of Control Medium High Shared Shared Shared

Compliance Framework High High High High High

Level of Management Bandwidth

Moderate High High High High

Upfront Investment Low Low Medium NIL NIL

Financial Risks Low Moderate High Moderate Moderate

Ease of Exit Moderate Moderate High Moderate Moderate

Cost of Exit Minimal High Moderate Moderate Moderate

Linear Sub-Non Linear Non Linear

28

Thank You


• Customer partner wants to reduce total cost of ownership through Application Portfolio

Rationalization to be leveraged through license, infrastructure, man power optimization.

• The outsourced projects will result into measurable savings for the customer and these savings

will be share as per agreed ratio. GSM will act as “Mortgaging the future” for customers.


Key Hypothesis

• Partner has various application, each with their backend on Oracle, which can be consolidated

thereby achieving a license rationalization.

• The licensing contracts may be per processor, while optimizing on few application

(hosted on server X), certain number of processors can be freed up in server X.

• If the licensing contract is per user, total number of users can be optimized.

License Savings

• Application consolidation and infrastructure optimization will require lower FTEsMan Power

Savings

• Consolidation of partner’s application/retiring application certain servers can be freed up and

effectively Server hardware cost, hardware maintenance cost, OS charges, backup, storage cost

and Disaster recovery can be saved.

Infrastructure Savings

• Post assessment study, Patni agrees to offer measurable tangible financial benefits

• For optimization in License usage, Infrastructure, map power reduction

• Productivity improvement YOY

Gain-SharingProposition

outsourcing option models

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